Dialing Back on Utility Costs

When Greystar Real Estate Partners acquired three apartment properties last year in Raleigh-Durham, N.C., the new owner installed submeters in each unit in order to gauge water consumption and bill residents directly for their actual usage. That method marked a major departure from the previous landlord who relied exclusively on rent to cover the cost of utilities.

The result? Water and sewer costs dropped by at least 75% at the three properties because the owner passed on a portion of the utility costs to renters and encouraged residents to curb wasteful practices, like letting leaky toilets go unreported. Owners at submetered properties still pay utilities for common areas, and often choose to pay an additional portion of total utility costs so residents aren't paying for energy lost through insufficient insulation or single-pane windows.

Actual savings for Greystar varies by property, but submetering at a typical 300-unit complex reduces annual water and sewer charges by $60,000 to $70,000. That savings goes right to the bottom line, according to Mark Hafner, a principal at the Charleston, S.C.-based company.

Because commercial values are chiefly based on net income, properties with submetering are worth more than similar properties that roll utilities into rent. “The total impact on asset value can be astonishing,” Hafner says. “That equates to about $1 million to $1.2 million in additional asset value.”

There are other methods for landlords keen on passing utility costs to residents. A ratio utility billing system (RUBS), for example, enables a landlord to allocate energy costs to residents based on apartment size. What RUBS doesn't do as well as submetering is encourage residents to conserve energy to minimize bills.

In a 2004 study, the Environmental Protection Agency found that submetering reduced energy use by 15.4%, while allocation without measurement had no effect on usage. That wasn't an option for Greystar because a statute prohibits RUBS in North Carolina.

For Apartment Investment and Management Co. (AIMCO), submeters are the preferred method of billing, whether or not local laws allow alternatives. About 95% of AIMCO's portfolio is submetered for water, says Don Baumann, senior vice president of income development at the Denver-based company.

Expenses passed on to residents help juice net income. That's why garbage collection is increasingly billed to residents rather than included in rent, and why submetering is so appealing to REITs, according to Baumann. “Submetering is very much expected these days by the shareholders,” he says. “Utility billings are definitely something that our investors look at and follow on a quarterly basis.”

New interest, old concept

The use of meters to track gas or water in individual apartments originated in Europe more than a century ago, but didn't catch on in the United States until the 1970s energy crunch made the cost of adding gas meters worthwhile.

Today about 85% of all apartments are metered for electricity, usually by a utility provider; 80% of units are metered for heat or gas; and a scant 15% are individually metered for water, says Wade Smith, a partner at Bristol, Pa.-based Wellspring Wireless Inc., which manufactures water and energy submetering systems.

Natural gas prices for residences in some states have more than doubled over the last decade. In Michigan prices have climbed from $4.72 per 1,000 cubic feet in 1995 to $10.38 in 2005. Much of that increase has occurred within the last few years (see chart). More recently water charges are climbing, particularly in drought-ravaged areas of the South.

Ripple effect of lower costs

The higher that energy prices climb, the more cost-effective submeters become. Meters range in price from about $150 per unit in new construction to as much as $700 in older buildings, says Smith of Wellspring. In high-rises, water may enter a unit from several points and require additional meters.

Savings depend on many variables, but based on 120,000 installations the landlords Wellspring works with generally achieve a 26% drop in usage and bills. Part of that savings is due to low-cost conservation measures that Wellspring tries to include with every installation to reduce waste. One Wellspring customer who used submeter data to pinpoint and correct inefficiencies in its heating system was able to cut energy costs by 56%.

That savings helps to pay for the cost of installation, usually within six months. As the drag of utilities on net operating income is at least partially lifted, landlords can reap benefits in the form of heightened asset value. An investment of $500 per apartment that produces $200 in annual utility savings for the owner pays for itself in 2.5 years, boosting income in the process.

Assuming the property was bought at an 8% cap rate, the boost to value is $2,500 per apartment. “Where else can the owner invest $500 to net $2,500 in asset valuation?” Smith asks.

Submetering alone won't correct the problems of older, worn-out or inefficient heating or cooling systems, experts say. Before billing residents, the landlord should identify and correct conditions that waste energy. Single-pane or improperly sealed windows and walls with inadequate insulation may squander more heating dollars than any wasteful tenant could, and should be addressed before initiating submetering.

“A lot of these older boiler systems are only 30% to 40% efficient, so with an upgrade to an 85% efficiency boiler system you can see up to a 50% reduction in energy costs,” says Troy Hull, vice president of Energy Billing Systems in Colorado Springs.

Most billing service providers perform an energy assessment of a property and then work with the owner to develop a strategic plan before beginning to bill residents. Part of the planning process is to determine the owner's goals for energy cost recovery, and that information is used to set parameters for the accounting software used to generate resident bills.

Playing by the rules

Landlords incur government oversight when they begin to bill residents for utilities, whether through RUBS or meters. Federal, state and local authorities regulate the health and safety effects of meters on drinking water, and various entities impose utility billing rules.

The landlord-tenant aspect of submetering means state attorneys general may also weigh in. That's why the companies that provide resident billing services often keep a stable of attorneys to ensure their clients are in step with relevant laws.

“You have a combination of plumbing, electronics and health regulations that make this a pretty robust set of requirements to work with,” says Radice of NWP Services.

Rules may favor one methodology over another, says Dan Witte, executive vice president of sales with American Utility Management Inc. in Oakbrook, Ill., which bills residents for apartment owners. For example, RUBS is prohibited in Miami and Delaware.

At the other end of the spectrum, New Jersey prohibits submetering for gas or electricity. Regulators there are easing restrictions, however, and do allow some submetering for water and boiler/chiller energy, says Smith of Wellspring Wireless.

Even where resident billing is allowed, it's a good idea to spell out in lease documents what type of allocation will be used and how tenants will be billed, says Phillip Neeves, director of HVAC solutions at ista North America, which bills about 1 million apartment residents in the U.S.

Multi-layered benefits

Despite regulation, submetering is usually a smart investment that yields a triple win. Submetering protects the landlord against high operating costs, enables residents to control energy usage, and encourages water and energy conservation. “The sooner people start paying attention to individual usage, the better off we're all going to be,” says Radice.

For Greystar, the decision to submeter for water in jurisdictions where RUBS is prohibited is a no-brainer, says Hafner, the company principal. Recently, the owner expanded its submetering to measure irrigation, reducing sewer fees.

Given the high return on investment, Hafner says, REITs can't afford to ignore the savings that submeters offer. “Submetering can be one of the most high-impact actions owners can take to quickly boost net operating income.”

Matt Hudgins is an Austin-based writer.

Meters for boilers and chillers get lukewarm reception

Manufacturers have come up with a variety of products to more accurately bill apartment residents for their use of centralized heating or cooling systems, but some service providers say the devices create problems that often outweigh their advantages.

To bill residents for a portion of energy consumed through a basement boiler or a rooftop chiller in a typical high-rise building, landlords have two basic options: A ratio utility billing system (RUBS) mathematically allocates a portion of the entire complex's utility cost to residents based on apartment size. Alternatively, landlords can install submeters that track the hours of use and temperature at each apartment's fan coil.

Through a complex calculation, a billing company then processes that data to bill the resident for his use as measured by the submeter, adjusting for a host of variables related to energy efficiency in the overall system and the individual apartment.

Because residents can reduce their bills by using less heat, meters typically reduce utility costs 18% to 39%, according to a 1999 study by the National Apartment Association and National Multi Housing Council. The RUBS method is less likely to encourage conservation, and only reduced bills 6% to 27%, the study found.

However, some billing service providers dislike time- and temperature-based measurement systems. Meters measure usage more accurately than RUBS, but residents are more likely to contest bills calculated by such a complex method, according to Dan Witte, executive vice president of sales at American Utility Management (AUM) in Oakbrook, Ill.

“It is like rocket science,” Witte says of metering central systems. “It's incredibly complicated and very hard to explain to somebody who's receiving a bill.”

About 25% of the 1,700 apartment communities for which AUM provides billing services use submeters with central boilers or chillers, but Witte says he generally discourages landlords from submetering centralized systems. “The challenge is to make residents comfortable with, and believe, the consumption that has been attributed to them. Then they will pay their bills,” Witte says.

RUBS may be less equitable, but the concept is easier for residents to grasp and therefore generates fewer complaints in Witte's experience. “At our call center, residents are usually angrier — and they tend to call more — at properties that have meters.”

Educating residents and owners is crucial to the success of a submetering program, says Phillip Neeves, director of HVAC Solutions at ista North America. Formerly USI Energy, ista bills about 1 million residents for water, electric and gas services.

Troy Hull, vice president at Energy Billing Systems Inc., says metering technology for centralized systems is gaining credibility. That's important for the Colorado Springs-based meter manufacturer and its competitors because central systems offer the industry's greatest growth prospects. According to Hull, “There are millions of apartment properties out there that don't have mechanisms in place to measure consumption at the apartment level.”— Matt Hudgins